Treasury Bonds Pull Back on Inflation Fears – Wall Street Journal

Treasury bonds pulled back Friday as anxiety grew that the Federal Reserve may fall behind in curbing the risk of higher inflation.

The 30-year bond led the selling, extending its price loss for a second straight session. Inflation chips away investors’ returns from bonds over time and the 30-year maturity is the most vulnerable to higher consumer prices.

In recent trade, the benchmark 10-year note was 8/32 lower, yielding 2.652%, according to Tradeweb. Bond yields rise when their prices fall.

The 30-year bond was 18/32 lower, yielding 3.493%. The yield traded close to 4% at the start of the year.

The price actions over the past few sessions suggest that bond investors are nervous about the path of the Fed’s monetary policy amid rising debate over when the central bank will start raising interest rates from rock-bottom levels.

Bond investors scooped up Treasury debt Wednesday as the Fed signaled that it wouldn’t be in a rush to raise rates. Fed Chairwoman Janet Yellen described recent inflation data as being on the “high side,” but she stressed that those figures are “noisy” and that inflation is evolving in line with the central bank’s expectations.

But sentiment appeared to shift in the bond market over the past session as concerns emerged that Ms. Yellen may be underestimating the risk of inflation.

“I think Yellen’s inflation-fighting credibility is taking a hit,” said Anthony Cronin, a Treasury bond trader at Société Générale SA. “It’s somewhat disheartening to bond investors to have the central bank chairman dismiss inflation so quickly.”

Recent data have suggested consumer prices have picked up after two years of sluggishness. Tuesday, the consumer-price index in May posted the fastest monthly gain in more than a year. The annual rate for the CPI was 2.1%.

Crude-oil prices, meanwhile, have climbed due to growing geopolitical turmoil in Iraq, raising concerns over higher energy cost.

“The Fed seems to not be concerned about inflation, which makes investors more anxious,” said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York. “Maybe the bond vigilantes will rise again.”

Demand for inflation protection surged. A $7 billion sale of 30-year Treasury inflation-protected securities Thursday drew strong buying from investors.

The value of TIPS rises along with inflation, which erodes the returns on regular Treasury bonds over time.

The Fed targets annual inflation of 2%, a pace it views as healthy for price stability and economic growth. While CPI has risen, the central bank prefers a separate measure—the Commerce Department’s price index for personal consumption expenditures—which has shown inflation still running below its target, at 1.6% in April.

Longer-term inflation expectations edged higher Tuesday but remained contained.

The 10-year break-even rate, or the yield spread between a 10-year Treasury inflation-protected security and the benchmark 10-year Treasury note, widened by 0.02 percentage point to 2.26 percentage points Friday.

That means investors expect the U.S. inflation rate to be 2.26% on an annualized basis on average in a decade. It has risen from 2.11% two months ago, but is still below this year’s peak of 2.32% set in January.

The 10-year yield has tumbled from 3% at the start of the year, its price boosted by the uneven pace of global economic growth, geopolitical risk in some developing countries and a record-low interest-rate policy from major central banks. U.S. bonds offer superior yields compared with their counterparts in Germany and Japan, enticing investors seeking relative value.

Write to Min Zeng at min.zeng@wsj.com

Treasury Bonds Pull Back on Inflation Fears – Wall Street Journal

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